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Finance Bill

My Lords, I, too, would like to congratulate the noble Lord, Lord Hamilton of Epsom, on his excellent maiden speech. My previous experience of his political skills was when he was chairman of the 1922 Committee and came to address us weekly at ACP meetings. We always went away cheerful and with our morale boosted by the fascinating snippets of information that he disclosed despite the difficult times after the 1997 election. I should like first to declare an interest as an investment fund manager. Once again we are discussing the Finance Bill at the end of the Session in July together with the welcome and now regular companion, the report on it by the Select Committee on Economic Affairs. Once again I should like to congratulate the chairman—this year the noble Lord, Lord Wakeham, and his team—on their excellent and detailed report. The focus of the report on countering tax avoidance is worth while and the conclusions are of great interest. May I politely ask the Minister whether in future years we might have a formal government response to the committee’s report for us to consider prior to this debate as has occurred with other Economic Affairs Select Committee reports? I feel that it would be appropriate for me to highlight a few items in the report but to focus in the main on other measures in the Finance Bill and then move on to a more general discussion of the taxation framework in the UK after eight years of a Labour government. The first key issue in the Bill comes in Clause 11, which contains the Government’s proposed restriction to the gift aid scheme. As has been stated by the Minister, this means that the aid will now apply only where the donation results in unlimited rights of admission for a period of not less than 12 months. The Conservative amendment quite sensibly proposed a reduction of this period from 12 to three months. A further amendment was intended to   expand the range of charities that may claim gift aid to include facilities which have interactive experiments with an educational purpose. The Government, I am pleased to say, did accept the purpose of the latter amendment but turned down the former on the basis that it would enable charities to claim gift aid on what were effectively admission fees. Will the Minister explain the rationale behind that government decision as our amendment seemed entirely reasonable? The next important issue, Clause 12 and Schedule 2, is dealt with well in the Select Committee’s report. I agree with its conclusion that employees remunerated by a convertible security should not be taxed at a greater rate than to the extent of the correct tax and national insurance forgone. I then move on to Clause 18, which covers authorised investment funds and specific powers. There are two points I wish to make here. First, despite many promises by the Government to introduce tax legislation to give effect to real estate investment trusts (REITs), as the noble Baroness, Lady Noakes, and the noble Viscount, Lord Trenchard, stated, such legislation is not included in this year’s Finance Bill. Other countries have REITs and tax regimes for them and I am concerned that the UK property industry is at a disadvantage and could seek to relocate abroad. The Government would not accept our proposal for a new clause to introduce legislation for the creation of REITs, and I would like to ask the Minister: what is the reason for the inordinate delay? Clauses 16 to 23 allow for changes to the system of taxing authorised investment funds to be made by regulation rather than by legislation, which gives too much power to the Inland Revenue to make the rules rather than subjecting them to parliamentary scrutiny. Can the Minister say why the Government are proceeding by that route? Clauses 24 to 31 cover avoiding tax through arbitrage. The clauses cause our party major concern due to their wide-ranging nature and the powers given to the Revenue. They introduce substantial Inland Revenue discretions and, consequently, substantial uncertainty for both UK multinationals investing abroad and for inbound investors. The Shadow Chief Secretary stated in the other place that,"““the legislation is far-reaching and has a very wide scope  . . . We are talking about major players who are vital to the health and well-being of the UK economy. There is scope for huge collateral damage, both to the financing of investment deals and  . . . to the UK’s reputation as a stable and predictable tax jurisdiction . . .  It appears to some people that the UK Government are seeking to appoint themselves the world’s policeman on arbitrage, to the uncertain benefit of the UK Treasury in the long run””.—[Official Report, Commons Standing Committee B, 23/6/05; col. 83.]" Clause 39 and Schedule 7 are covered in the Select Committee’s report, and I could do no better than to highlight some of its conclusions. The report states:"““we remain concerned at some indications that anxieties which have been put to us—including, for example, the apparent harm to the position of group finance companies carrying out normal foreign exchange risk operations—have not been put to HMRC or, if they have been, have not been fully taken on board and responded to””." The Shadow Chief Secretary to the Treasury commented:"““The reason that it is controversial . . . is that practitioners and industry representatives are concerned that several provisions in the schedule mean that the focus of the legislation is still too wide and in some cases will lead to uncertainty. The Bill will need to be clarified by the guidance or rules issued by the Revenue, which do not have the force of law and, thus a less certain climate would be created than if the whole matter were dealt with in the primary legislation””.—[Official Report, Commons Standing Committee B, 28/6/05; col. 200.]" Does the Minister agree with that argument? Clause 40 and Schedule 8 prevent private equity and venture capital groups obtaining excessive tax deductions from loans made from overseas to the businesses they own. The Shadow Chief Secretary stated that the Government were, in effect, using a sledgehammer to crack a nut. He said that, while claiming that they wish to,"““address narrow concerns. The industry’s fear is that the Bill is potentially wide-ranging and could have significant negative impacts on both the UK private equity and venture capital industry and UK businesses that are financed by private equity or venture capital””.—[Official Report, Commons, 13/6/05; col. 71.]" Can the Minister allay the industry’s fears? Two final clauses received major attention in the other place. First, in Clause 42 and Schedule 9, covering life companies taxation, once again the Government are leaving much of the detail to secondary legislation. Can the Minister explain why that needs to be the case? Secondly, regarding Clause 49 and Schedule 10, which cover stamp duty land tax, can the Minister say why they are necessary and why property cannot be transferred around in a group for what is regarded as normal and acceptable tax planning reasons? There is no doubt that one of the big achievements of the Labour Government has been to complicate tax law. As I have stated previously, almost every year, the Finance Bill seems to get longer and longer. Between 1965 and 1986, the length of the Finance Bill was, on average, 151 pages. From 1997 to 2004, the average length has been 346 pages. As the Bills get longer, they become more complex, resulting in increased opportunity for legitimate tax avoidance. Politicians should take into account the work of Professor Arthur B Laffer, the originator of the Laffer curve, which was designed to illustrate the relationship between the amount of revenue raised by a particular tax and the rate of tax. Broadly speaking, the yield from a tax will increase as the rate moves up from 0 per cent to a certain rate at which the overall yield will begin to reduce. That is, first, because people will be less willing to work to get the income to pay the tax. Secondly, the yield will reduce because of tax evasion for which the apparent reward is greater the higher the tax rate, even though the risks of criminality are great. The third reason is legitimate tax avoidance. There seems to be an increased body of evidence that high tax rates lead to greater tax avoidance. The Government would do well to heed this. On the one hand, where they have lowered taxes on the corporate tax front—although not enough, as I will discuss later—and business capital gains tax, these measures have been well received and tax has been paid. However, the continued obsession over tax avoidance schemes, while superficially seeming sensible, actually create further loopholes which will be exploited by the army of advisers who specialise in these schemes. I am sure that the Minister, bearing in mind the strictures in his opening speech, criticised these when he worked for his   accountancy firm which, I understand, has a flourishing division promoting them. This brings me to the possibility of a flat tax—I see the noble Lord, Lord Patten, in his place—which has been adopted by countries such as Russia and Estonia and has been seen to be working. Will the Minister summarise why the Government are opposed to this great simplification of the tax system and why it could not be set at a rate which is revenue neutral and what that rate might be, bearing in mind that he said in the flat tax debate that at 22 per cent £50 billion of tax might be lost? The Institute of Chartered Accountants’ tax faculty produced an interesting memorandum on the Finance Bill at the end of May 2005. It stated:"““We are concerned about the cumulative effect of lengthy complex and onerous tax legislation on the international perception of business people that the UK is a good place to do business. We welcome the measures introduced in recent years to encourage inward investment; for example, the substantial shareholding exemption and the rules for intangible property. However, we are worried that this Finance Bill will act as a disincentive to inward investment””." The article goes on to express a key principle that the UK tax system should be competitive. This means, in the institute’s view, three points: first, the UK should have reasonable rates of tax; secondly, it should provide full and effective relief for overseas income and taxes; and, thirdly, it should be simple, straightforward and with the minimum of red tape. On the first point, the institute expresses concern that the corporation tax rate is not reasonable compared to, for instance, the Republic of Ireland’s rate of 12.5 per cent and believes that the republic has been very successful in attracting business that would have probably come to the UK. On the second matter, it points out that in respect of full relief for overseas income and taxes most European countries have an ““exemption”” system for foreign source income whereas the UK has a credit system of double taxation relief. It believes that the UK’s credit system is more difficult to understand and will tend to discourage business. The institute states that in 2000 the UK made some highly controversial changes to the rules which made the system highly complicated. The arbitrage rules of Clauses 24 to 31 and Schedule 3 to the latest Finance Bill now add yet more layers of complexity. Indeed, the institute believes that these more complex rules tip the scales of competitive advantage in favour of the USA and against the UK. On the third point, the institute commented:"““We suspect the estimates of additional compliance costs are too low  . . . Highly complicated legislation will increase the cost for businesses and foster the worry that the UK is becoming an expensive place to do business””." The institute’s final point—and mine, too—is its concern over the ever-increasing reliance on secondary and tertiary legislation; for example, in Clause 1. We have of course seen this as a major stealth trend in many other Bills since 1997 to bypass detailed parliamentary scrutiny. The institute writes,"““Our first tenet is that tax legislation should be enacted by statute and subject to proper parliamentary scrutiny by Parliament. Whilst in some cases delegating powers to secondary legislation allows time for consultation and further refinement, too often this is not the case””." In summary, as usual, the devil in the Budget is in the detail and superficially a rather dry and dour Finance Bill conceals measures that could seriously affect the UK business environment.